Too many stocks climb into earnings release and then collapse. Some climb after release but who can predict the winners in advance? IRBT s a good example. While I can see a few technical reasons in the chart that provided to me some warning signals to get exit my position (like the bounce off of the upper Bollinger Band), the best advance signal was the next earnings date (now 4/25/2017), which always appears at the top of my charts–thank you TC2000! One way to protect one’s position into earnings other than by selling out is to purchase short term put options (as insurance) on the stock.
I noticed over the weekend the incredibly weak price trend of just about all stocks and ETF’s that are related to India. I learned a long time ago that when the U.S. Federal Reserve raises interest rates to combat inflation, it eventually leads to a market decline. When the Fed thinks that the economy is growing too fast and likely to produce inflation, it applies the brakes by raising short term interest rates. Higher interest rates mean higher costs for businesses and consumers who borrow money, and the economy slows. Because fine tooling the economy is an inexact science, the Fed usually errs by applying the brakes too hard, bringing on a larger slow down than intended, and often a recession. Thus, a series of rate hikes usually kills a market up-trend. The very smart stock analyst, Martin Zweig, many years ago published a careful empirical analysis of the impact of the Fed’s actions on the U.S. stock markets. Of course, in the United States the Fed is still stimulating the economy by buying securities and printing money.
However, a series of interest rate hikes is currently occurring in India. I found this article after the weakness in India stocks prompted me to search for any explanation. I first wrote about the India auto manufacturer, TTM, last August, when it closed at $22.49, an all-time high. TTM subsequently peaked at $37.65 near the end of November and began a sustained down-trend, closing Friday at $24.71. Note on this daily chart (click on to enlarge) when TTM closed below its 30 day average (red line), which was a perfect sell signal. With the 30 day average now heading down, this stock is in a sustained short term down-trend, according to my definition. (It all looks so simple with 20:20 hindsight! Actually, it is if we just ignore the media noise and concentrate on the stock’s price trend.) This India automaker, was, perhaps, reflecting the impact of higher interest rates on consumer demand for cars. (But the putative rationale for the decline is not as important to me as the price action. The bad news usually comes out long after a stock has peaked.) I could short TTM, but I prefer buying put options this week on an India ETF or bank. The following India related stocks have closed below their 30 week averages and look ominous to me: INDY, PIN, EPI, IIF, IFN,INP,HDB, INXX.
By the way, I do not want to alarm you, but while the trend of India stocks looks the worst, it has plenty of company in the stocks/indexes of other countries, including China (CAF, CHIQ), Brazil (BRF), Turkey (TUR), Chile (CH), and Thailand (TTF). And I guess we should not omit Egypt (EGPT)…………
But the technicals for the U.S. markets look a lot stronger— for now. The GMI is 5 (of 6) and the more sensitive GMI-R is 7 (of 10). The GMI-R contains more short term indicators and can signal a change in trend earlier than the GMI. Both the short and longer term up-trends are intact, although the QQQQ is sitting right on critical short term support. A couple of down days this week could end the QQQQ short term up-trend, which completed its 48th day on Friday. The SPY and QQQQ completed their 21st week above their 10 week averages. When the QQQQ is above its 10 week average I am most likely to make money buying tech and growth stocks. A close of QQQQ below its current 10 week average (54.70) would signal to me to exit the long side of the tech market. The Worden T2108 indicator is in neutral territory, at 54%. A sign of short term weakness is the fact that only 32% of the Nasdaq 100 stocks closed with their MACD above its signal line……
So where do I stand with my accounts? My university pension remains 100% invested in mutual funds. I only exit them when my longer term indicators are very weak. However, my trading IRA and margin accounts are mainly in cash or a little on the short side. Fortunately I exited most of my long positions over a week ago when I became worried about the impending municipal bond crisis. While the pundits blame Friday’s market decline on the crisis in Egypt, those who have been following this blog understand that there are a lot of other reasons to expect market weakness. The very low percentage of advisers who are bearish (19.1%), the sudden selling in previously strong stocks (FFIV, CAVM, PANL, CREE, CTXS, APKT, AMZN) and the failure of AAPL and GOOG to go to new highs after their great earnings were released are especially troubling signs to me. With the end of 4th quarter earnings announcements, there may not be a whole lot to inspire stocks to advance over the next few weeks….
You may recall that IBD announced at the end of December that they were abandoning the IBD100 list published every Monday for the IBD50 list. During QQQQ up-trends I typically selected my buys from the IBD100 list. In past posts I have shown that the types of high growth momentum stocks that meet the criteria for inclusion on the IBD100 list typically outperformed Nasdaq100 stocks in an up-trending market but underperformed them during a falling market. This is because stocks that climb rapidly usually are abandoned quickly by traders when the market turns down. I analyzed the performance of the IBD50 list published on January 10, 2011, using the prior Friday’s close (1/7) as the starting point and going through Friday, 1/28. I found that during this period, 32% of the IBD50 stocks rose; 12% rose 5% or more, and 1% rose 10% or more (TSCO, +7.6% and NFLX, +21.6%). In addition, 10% declined more than 10%, with FFIV falling the most (-20.8%). The first stock listed in this IBD50 list, RVBD, declined -7.4%. In comparison, during the same period, 42% of the Nasdaq100 index stock advanced, 17% rose 5% or more, and 7% rose 10% or more. 4% declined -10% or more, including FFIV. The IBD50 list is designed to use more stringent criteria than the IBD100 list did. At least for this limited case and time period during which the Nasdaq100 index declined (-.25%), the IBD50 list apparently underperformed the Nasdaq100 stocks. I will replicate this analysis in the future with subsequent IBD50 lists.
On Saturday, I had the opportunity to present for 2.5 hours at the Worden software work-shop. I showed the audience how I use TC2007 to manage my trading. It was gratifying to see the warm reception I received from a local, primarily older adult group. I just finished two courses at the university and have been accustomed to lecturing to college students. It was a new experience for me to present to a class of people who were their parents’ ages. A big surprise was that my star student from three years ago surprised me by attending the work shop and told me that when he graduates in a few weeks, he will move to California to open up his own mutual fund. The year after he completed my course, he made a lot of money buying put options (betting on a decline) on USO during its dramatic decline in 2008, from over $100 to around $22. So the afternoon presentation was an exciting time and most of the 120 attendees said they would take my course on the market if it were ever offered more widely………
The market action last week spooked a lot of people. My account actually rose on bizarre Thursday, with my position in TYP. This is now a good time for me to be in cash on the sideline. The GMI and GMI-R are both back to one. The only indicator that is still positive is my weekly indicator of the QQQQ. The QQQQ remains in a Stage 2 up-trend (see weekly chart of QQQQ), as defined by Stan Weinstein (see his book to right). So, in my trading account I am short and mainly in cash. In my university pension I remain fully invested in mutual funds. I only transfer my pension funds to cash when the weekly trend enters a Stage 4. By that time, the 30 week average will have curved down. I have successfully avoided past major down-trends by getting out at the beginning of a Stage 4. Note that the QQQQ closed right on the 30 week average (red). As long as the 30 week average continues to rise, I will ride this up-trend in my pension account.
In spite of the short term down-trend in the QQQQ, I do not think this is the time for me to begin to short stocks in my trading account. This is because the Worden T2108 indicator, at 15%, is already in an area where prior bottoms have occurred. If this indicator, which declined from 64% last Friday, should hit single digits this week, I would be looking for a bottom. I might even buy some QLD (ultra long QQQQ ETF), if that occurs. Every time I have said this, I get scared when the T2108 hits such a depressed level. This time I will try to take advantage of a further drop into such an extreme level. The T2108 touched 6% at the re-test of the bottom in March, 2009, and 1% at the panic bottom in October, 2008. These were extreme readings, however, not seen any other time in the past decade. Friday was the third day of the new QQQQ short term down-trend. I will be more certain of this new down-trend if it lasts for 5 days. Once we pass that point, trends tend to last for a while. Note that only 1% (1) of the Nasdaq 100 stocks closed with its MACD above its signal line, another sign of short term weakness. For the first time since February 4th, there were more new 52 week lows than highs (46 vs. 10) in my universe of 4,000 stocks. This is not the time for me to be buying stocks at new highs.
I looked at the performance of the IBD 100 list published on Monday, 4/12/2010. Since these stocks closed on 4/9, only 17% have advanced through last Friday. Put another way, during this period the QQQQ has declined 7.4%, while more than half of the IBD100 stocks declined 9.5% or more. Growth stocks tend to go up more in up-trends and decline more in down-trends, as traders take profits. For example, since 4/9 to 4/26 when the QQQQ topped, 50% of this IBD100 list advanced 4.9% or more, while the QQQQ increased only 2.8%. So I continue to concentrate my buying in IBD100 stocks, but only in QQQQ short term up-trends (within a longer term up-trend).
By the way, remember I ran my submarine scan on 4/29? Well, since then, all nine of the stocks that came up have declined, as did all of the Nasdaq 100 stocks. Three of the nine (33%), however, are down 17% or more, during a time when the QQQQ declined by 9.6%, but only 5% of the Nasdaq 100 stocks declined 17% or more. So,at least that time, the submarine scan did select stocks with a greater likelihood of sinking more during this period.
Remember, one must trade with the trend in order to maximize the chances of success. Right now, the short term trend is down, and I will not go long. (The longer term trend is still up (Stage 2), so I will keep my pension invested in mutual funds and continue to dollar coast average in with new contributions, until it looks like Stage 2 is over.) I trade like a chicken, run from a down-trend, and conserve my capital to trade only when the odds are in my favor.